The AM Best Rating – A Consumer’s Indispensable Tool

In this time of economic upheaval, consumers are searching for footholds to aid them in scaling the mountainous terrain of choosing insurance products. An AM Best rating is one tool that trendy consumers are using to guide their decisions.

What is an AM Best rating? It is an independent, third party evaluation of a company’s financial strength based upon qualitative data (or data that describes the characteristics of an organization) as well as quantitative data (measurable and verifiable data based on statistical analysis). It includes a thorough evaluation of an organization’s balance sheet strength, operating performance and business profile. Why is that important to the consumer? It is a strong indicator of the insurance company’s ability to meet its financial obligations to its policyholders. An insurance policy is only beneficial if the company is able to pay claims after a loss.

Founded in 1899, the AM Best Co had as its mission “To perform a constructive and objective role in serving the insurance marketplace as a source of reliable information and ratings dedicated to encouraging a financially strong industry through the prevention and detection of insurer insolvency” (2008 Best’s Insurance Reports). Since that time, AM Best ratings have been the benchmark worldwide for assessing insurers’ financial strength. In this article, we will examine the two primary components of the AM Best rating for consumers: the financial strength rating and the financial outlook score.

AM Best evaluates insurance companies according to financial strength and performance much like our educational institutions grade students. These ratings range from
A ++ to F and indicate to the consumer if a company is a prudent choice to handle his/her insurance business. Following is a breakdown of ratings:

A ++ and A+ Superior
A and A- Excellent
B++ and B+ Good
B and B- Fair
C ++ and C+ Marginal
D Poor
E Under regulatory supervision
F In liquidation

Since the rating is one predictor of a company’s ability to handle financial obligations to its policyholders, the higher the ranking, the greater the ability to sustain financial commitment during adverse changes. I don’t know about you, but when I have a loss, I want excellent or superior chances that my insurance company can pay me to cover it.

A second component to understand is the company’s financial outlook. AM Best uses three criterion to gauge a company’s financial outlook.

1. Positive. This indicates that the current rating may be upgraded in the future.
2. Negative. This indicates that the current rating may be downgraded in the future.
3. Stable. This indicates that at this time it is unlikely that the rating will change in the future.